Taxing times… November 24, 2008

As announced in the Guardian today, Alistair Darling is increasing income tax for those above £150,000 to 45p in the pound. The reason? “…to help pay for Labour’s £15bn anti-recession emergency package.”

The UK faces a not entirely dissimilar economic and financial situation to this state. And there they also…

Face … the challenge of reducing state borrowing from an expected £120bn next year, the chancellor will use today’s pre-budget report to break New Labour’s 15-year taboo on raising income tax on the wealthy. Darling will also unveil a one-year cut in standard-rate VAT from 17.5% to 15%, in the hope consumers bring forward spending and shorten the recession.

Of course that taboo is not one restricted to the UK either. This state has seen a remarkable inability of our political class to shift away from the low tax base that has typified the past fifteen or so years. One could ascribe this to a sort of fetishistic attachment to processes that seem to have worked over that time period, certainly it’s hard to see any particular rigour in the explications provided for same… well, at least, not much more than ‘…it worked, I tell you, it worked’.

…he is not ruling out income tax increases in the future. He said current borrowing was “unsustainable in the medium term” and a radical re-evaluation of day-to-day expenditure would be ongoing.

Is that sound one hears that of pennies dropping all over the shop… Maybe.

Now it is fair enough to say that, as noted by the Institute of Fiscal Studies, the UK measure isn’t going to bring in an enormous amount of money. The number of high earners affected is projected to be about 400,000, still it all adds up. And the current 40p in the pound rate affects a larger cohort of about 4 million.

But that is hardly the point, and it’s distressing – albeit unsurprising – that Vincent Cable of the Liberal Democrats has weighed in to call this a ‘negligible’ measure.

Because the real import of this is to see an extension of the progressive tax principle to those who make such sums that 40% is of minimal impact upon their finances. 45% is hardly more so, logically for taxation to make the same impact on higher earners as it does on lower earners it would have to be much much greater again, to a degree that would be unsustainable in our current political structures, but it demonstrates that – at last – their incomes are no longer sacrosanct. And again it brings us back to concepts such as social solidarity and citizenship, the sense that all should be involved in broader societal processes.

Like John McDonnell I would see a 50% rate as being of greater utility, but for a government that pledged prior to assuming office in 1997 that tax increases were off the agenda this is a smallish step in the right direction.

Ireland has no control over interest rates and exchange rate, and it has no central bank. Its budget deficit is 8% of GDP, and the liabilities of its financial sector is double GDP. Lenihan has little room for maneuver as recession moves towards depression. Selling the banks to U.S. capitalists seems like the next move.

Only in name: it has none of the usual Central Bank functions such as setting interest rates and controlling the supply of money. Ireland has little influence on the policies of the ECB.
With its huge budget deficit Ireland already has an expansionary fiscal policy. Any further expansion of this deficit begins to put the solvency of the state itself in question. And, given the openness of the Irish economy, much of the effect of any such stimulus leaks abroad.